Nicolas Darvas´s book, “How I made $2000000 in the stock market” is one of the classics about the stock markets, and not without reason.
A good deal of those interested in the stock markets does not find any utility in that book.
Nicolas Darvas trading system
There are no fancy indicators; neither there are fantasy stories about day trading.
Let your profits run is not as popular as day trading is between novice and young traders. Darvas´s method is not easy money, neither you will make 500% year after year without risk.
Darvas´s book is about how to trade in an intelligent way.
Nicolas Darvas story
The Darvas story is quite extreme.
The man made something like a 5000% return in three years. Any investor should be happy with a 20% annual return, or 75% in three years. And, those numbers are reachable if we use a similar approach to that of Darvas.
The broker will not go rich with that sort of trading, but they do not care anyway. They have plenty of “wanna be” day traders.
We should consider that the conditions present at the moment Darvas made its deed in the middle of one of the best bullish markets.
The 1958-1959 bull market was one of the best ever.
However, periods like that are quite common, and it is likely that there are some years like that every decade. Just look how the American markets have behaved last five years.
Therefore, there will always be chances to make money doing what Darvas did.
Nevertheless, the money this man made in three years, starting from such a low point, is very difficult to repeat.
You need to trade like a professional, choose the right stocks and have a bit of luck. Very unlikely, but not impossible. We should find our Tesla Motors, get some leverage, and let our profits run indeed.
Nicolas Darvas strategy
Like many, Darvas started trading the markets doing what he should not do: buying and selling too frequently, and following expert’s tips. He lost money in the beginning. Then, some day he realized that he had a stock that had doubled in price. He understood that he did not sell the stock earlier because he was on a dancing tour on Madrid. Therefore, he did let his profits run.
Later on, he had another problem when he went to one of his broker´s offices in New York. There, he lost money, and he realized that it was due to abandoning his system that worked so well when abroad, with the help of the phone and cable.
In New York he experienced the world of gossip, tips, emotions, over-trading.
He clearly saw that the best he could do was to do as before, going to a club far away, and trade quietly, sending a daily cable, which was his only relation with the markets.
There came a time when Darvas observed that the best performing stocks were those that had been rising a lot with an increasing volume.
Normally, he would buy stocks that had already risen 100% or more, and had a volume significantly bigger than months or years before.
Darvas was not the first to realize that buying the best performing stocks was a good idea.
Darvas studied the different sectors and the possible best stocks.
He told his broker that he wanted to know any significant move accompanied by an increased volume. It was in those cases where he would trade.
Nicolas Darvas stop loss
Darvas used buy stop orders to buy and sell stop order as protection.
He knew that he had to protect himself from unexpected moves. And, he was using some leverage, and when you use leverage, you have better use stop loss always.
When a stock behaved like he liked, and was one of the ones he had in his radar, he decided to buy. When that happened, he used to place his stop loss order just below the lowest price of the last range. What he would call “boxes”.
A “box” would be the typical trading range with a resistance and support price, in which an asset would stay for a while. This is what we could call a “sideways market”.
For instance, a stock rises from 20 to $35. From that moment, the price stays between 32 and 35 for six months, before breaking up again. That would be a box for Darvas. In a case like that, Darvas would buy – providing that the volume rule was fulfilled – the stock in $28 with an initial stop in 26.5. If the stock keeps rising and stays in the “box”, Darvas would trail his stop to just below the support, what means, below $32. He would do the same action if the stock rose again and formed a new box.
Nicolas Darvas trading secrets
The success that Darvas enjoyed those last years of the fifties was not easy.
He was lucky to enjoy a very good bull market in 1958.
However, his book´s lesson has to be found reading between the lines. Things as basic as these:
- Expert´s tips do not work.
- Let your profits run. The best thing a trader can do.
- Do not trade too frequently. Brokers do not like it.
- Buy rising stocks with increasing volume. Those stocks are by whatever reason attracting someone´s interest.
- The easiness of trading from a long distance in a few minutes using a cable or a phone.
- Trading with the “public” in the office is not a good idea. Do not get your system and discipline, get influenced by the emotions of the markets.
- Buy stocks which are behaving better than the rest of their sector. It does not matter if they had doubled in price recently. In fact, that could be a good signal.
Thanks for reading and sharing.